Tuesday, September 11, 2007

I love the Harvard Business Review. But as the years pass I've grown less interested in the articles that offer me a secret sauce to easily grow my business, outwit my competitors or take advantage of new opportunities.

They begin to sound like the infomercial guy back in the 1980's showing me how to make millions by buying houses with cash advances on credit cards and selling the houses quickly for profit.

My question to him was: if your secret is really that great, why are you wasting time on TV telling me about it?

The latest effort is "The Strategic Secret of Private Equity" in the September HBR (free link). Apparently private equity companies have discovered a better way to run a company--buy it in order to fix it up and sell it. (It sounds suspiciously like the credit-card cash advance guy.)

Are many private equity companies doing well? Yes. Have they exploited inefficiencies in the market? Yes. Will these inefficiencies be around long enough to help anyone who reads "The Strategic Secret of Private Equity"?

No.

Markets are complex/chaotic systems (read this post from Gary Klein's guest blog on Cognitive Edge for insight on the financial markets as resistant to quantification). Past performance is no indicator of what will happen in the future, especially the near future. Factors that enabled the private equity boom, including initial reactions to Sarbanes-Oxley regulations, cheap and abundant bank financing, and, most recently, the pack mentality at work, will not and cannot persist. Complex systems adapt.

It's more likely we'll be reading something like "The Benefits of Lower Leverage" in HBR next year than people still extolling "The Strategic Secret of Private Equity." And the newer article will have as much long-term value. But that's the magazine business. There's always a readership for strategic secrets.

And if you think the supposed long-term advantages of private equity haven't been explored before, check out "The Eclipse of the Public Corporation" (link - $$) from HBR, published in 1989.